EARN MORE FROM EACH MARKET CORRECTION
I’m often asked what are my long term projections for the markets. My reply is, “You don’t want to know.” Why? Because if you use a long term forecast as your method of holding a position until that target is reached, you’ll probably do something I call, “cutting your string of profit short”.
Here’s what I mean:
Let’s say the market was at point A, and in one year I told you it would be at point B.
If you trusted my forecast, you might ride out the “dips” along the one year path, and feel pretty good about the trade when you arrived at point B one year later. Your “string” of profit would have been the straight line between point A and B, or a 100% in this case! But that approach would have cost you.
Let’s look at the changes in price during that time, and instead of riding a position up then down, let’s calculate what would happen if we traded the dips instead.
In this approach, we’ll be buying at point A, selling at each peak and moving to cash, and then buying again at each low that occurred between points A and B. Here are those results:
What just happened is that you lengthened your string of profit so that instead of making straight line gains between A and B, you earned additional profits by including the upside after each dip.
In essence, by avoiding the downside correction “dips” by moving to cash, you profited each time the dip then turned upward. Your gains increased from 100% to 160% over that same one year period. And just as important, it only took a couple extra trades to do it!
This is exactly what professional traders do, they BUY THE DIPS. It dramatically increases their returns over time, and that’s why it’s important for you to do the same, it really works.
There are basically two ways you can accomplish that:
First, you can exit a trade at each peak and move to cash as we showed, and then buy a stock back immediately after each dip. Secondly, you can moderately increase returns by holding on to an existing position through the dips, but ADDING to that position after each reversal low. (The first approach is clearly preferable in terms of gains, but requires a powerful tool like CATs to help you nail each high and low. But the incredible profit difference using CATs makes the minimal effort worth it!)
The important point in all of this is that you are ALWAYS a buyer at each correction low. Every dip along a bull market trend should be considered a vital profit improving opportunity for your portfolio!
Here’s an example of buying intermediate lows (green), and using a single stop (roughly a 21 DMA) , compared to buy and hold (burgundy) over the past 5 years, or since the bull market began in 2009:
This is a strategy we use daily here at The Market Forecast. We even have an automated program that we are beta-testing with some of our members that will probably be released in January!